Nifty This Week: Technical Charts And More – Caution Is The Byword For The Week Ahead

What a sudden twist in the tale. No one expected the kind of move that occurred over Thursday (on the SGX with the holiday here) and Friday (here). It’s a funny thing but there have been a few occasions when the overseas action has been very large but we have somehow escaped those carnages. Friday, though, did not bring the kind of recovery that earlier such occasions have – even though one could not complain much as the lows visited by the SGX on Thursday were not reflected at all.

One of the main contributors to the weakness was the decline in the banking sector. Through the week, one heard enough chatter that banks would improve. However, the actual trades belied such chatter and both private and public sector banks continue to remain under pressure, keeping the biggest weight (by sector) on the Nifty a drag on its gains.

The way the market had closed on Wednesday before we went away for the holiday, there wasn’t any indication, ostensibly, that the market was likely to witness any pressure. So most normal players went home with long positions. Since recent experience has been that these sharp falls do not see any follow-through action to the downside, people were also somewhat complacent. The only pattern out of kilter was the sharp increase in the call option shorts, which rose substantially on Wednesday.

The Put-Call ratio had hit its lowest on July 27 at 0.71 and the market bottomed there and sped higher over the next many days, reaching a high of 1.82 early this week. So the sudden drop in the PCR to 1.34 on Wednesday and further to 1.18 on Friday showed that there was long Call liquidation and substantial addition to call short Open Interest.

So does it look like someone somewhere maybe had wind of what was to come?

Overall, the Max pain is at 16,400-16,500 area, and Put OI domination continues to be seen. Therefore, it is still possible that the bears have not really made a foray into the bull fortress. Also, the index is still somewhat far away from the points of danger to the trend.

We note two things on this chart. The main support trendline coming from the lows of March 2020 is still intact and will get into trouble only below 16,000-16,100 levels. Also, note on the same chart that the RSI has moved to a new high for the current move so any momentum weakness is absent on the daily charts. These two findings on the chart combine to tell us that we should still give the benefit of the doubt to the bulls and expect them to contain a further push to the downside if attempted.

But the problem was not these moves. It was the lack of anticipation for such a movement. The funny thing in the market is that no one, repeat no one, who takes a trade, expects to fail. But we all know that the market is a game about the future and hence failure is part of that game. So while we may not expect to fail, we must always plan for it.

One of the plans is to have a trailing stop. But for most, executing a trailing stop is very tough.

Sticking to a buy-the-dip approach has been the right thing to do in this market. Now we are once again at a juncture where we have to ask whether it is still the right thing to do? For those who are following the trend, there is no dilemma – the answer is yes, please stick to it. But for those who are into forecasting, there is always a dilemma, because there is no real answer to the question of whether this is the fall that will finally break the trend. So, for the forecasters, the job is made more difficult because they have to take a stance.

For sure, we have also forecast dips in earlier columns only to see the market remain down very briefly and then make a comeback. But we have made good by getting back into the trend as soon as it signalled us its intent.

This brings us down to the very question of why do I write this column or why are you reading this column?

I do this to keep myself prepared for all the eventualities that the market can show and I am certain that my readers too are placed similarly. Or should be. Many people believe that luck has much to do with success in the market. It does have a role but I don’t believe that to be the case. My view is that our effort and preparation are what make luck smile upon us from time to time. We don’t control luck, ever. So the next best thing to do is to control what we can – our effort and preparation. If we do this, we can also make the most of it when luck does smile upon us.

I generally avoid very forward-looking forecasts in these columns, preferring to track the moves and opine on what is immediately possible. The further out you go into the future the hazier it becomes. In the last week, I alluded to some aspects of WD Gann, the master forecaster of all time. Using one of his numerous methods, I reckon that the time window starting from Monday, Aug. 23 is a bit of a critical one for the market trend. If we cannot cross and hold above 16,575 levels now, the trend is in danger of slipping lower. If we do, then we get a fresh lease for higher targets and the time factor may get pushed to the second week of September. An important price inflection point in the next week could be 16,410. Take these price and time counts as indicative for creating a plan and not as absolutes. When you get into price and time match areas, it is best to remain cautious and trade only those where conviction is high.

The breadth situation in the market is not a very happy one at the moment as indices are hitting all-time highs but stocks and sectors have not been keeping pace. In fact, the small and midcap space, the usual indicator of retail trade, has been struggling to stay with the uptrend. As mentioned earlier, the banks have been a drag, and metals that looked pretty spiffy until now were clobbered badly and charts of most leaders have undergone some damage. Ultimately, most of us trade stocks and if they are not performing then we do need to sit up and take notice. So, caution is the byword for the week ahead.

CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise, and NeoTrader; and chief investment officer of Plus Delta Portfolios.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.

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